In a recent Wall Street Journal opinon piece, the historically market-oriented Hoover Institution senior fellow John Cochrane argued that “Trump’s Monetary Policy Desires Aren’t Crazy.” As part of his defense of Trump, Cochrane puzzlingly contended that the federal government exports its debt in return for “consumer goods.” As constructed, the argument mistakes causation.
The remarkable power of compound returns means money is ruthless. Which means the ability to borrow is directly related to one’s ability to pay back monies borrowed.
By extension, U.S. debt isn’t what yields Americans “consumer goods,” rather abundant imports are a direct effect of herculean production stateside such that Americans are the world’s biggest consumers. Government debt springs from the former.
It’s only logical that a government with taxable access to so much productivity is viewed in the marketplace as a safe loan. Which is a long way of saying that exports of debt aren’t the source of “consumer goods” as much as the unrivaled acquisitiveness of wildly productive Americans renders very attractive the debt issued by a profligate political class on their heavily taxed backs. So, while the debt in no way adds to U.S. economic growth (quite the opposite), it’s certainly an effect of U.S. economic growth.
Cochrane then pivots to inflation, or what it might be. Gone are the days when inflation is what it has always been: a shrinkage of the exchange medium, in our case the dollar. In Cochrane’s case he wants it to be more than what it is. He cities “’supply’ shocks” in "the 1970s and 2000s” as inflationary, but they couldn’t possibly have been: if one or more goods costs more due to a lack of supply or compromised supply chains thanks to lockdowns introduced by Trump #45, then logically other prices must be falling.
Cochrane then addresses the popular view within the Austrian School that the Fed has resources, and that it creates inflation with low rates of interest. Cochrane thankfully isn’t so sure about the latter, but buries his wise skepticism in “empirical estimates” and “’new Keynesian’” theory. A better answer would be that to borrow money is to borrow goods, services and labor, and since the Fed has none of the three mentioned, it’s mistaken to presume that it can increase or shrink credit with its vain stabs at price controls.
From there, Cochrane could have just said what’s true, that inflation is an effect of currency shrinkage, and the dollar’s exchange rate has never been part of the Fed’s policy portfolio as is. Alas, inflation truths likely weren’t the purpose of Cochrane’s op-ed.
Instead, his motives seemed to be rooted in a desire to make nice with President Trump. Friendship in mind, Cochrane wrote that “Interest rates should be lower,” plus “The Federal Reserve should be less independent.” About the first friendly comment, readers were perhaps understandably perturbed that Cochrane left out rent, Ferraris, and cashmere sweaters, among other market goods that should cost less. It’s difficult to not imagine that Cochrane wouldn’t have written as he did about rates when Joe Biden was in the White House.
Which perhaps explains the second bouquet tossed at #47. Regardless of whether the Fed should be independent, and regardless of whether it matters (it doesn’t), it’s hard not to conclude about Cochrane’s excessively friendly observation that far from an expression of a desire for greater constitutional governance, Cochrane’s nicety was pregnant with a quietly expressed desire to show Trump just how subservient a future Fed official would be. Which means John Cochrane as a high up Fed official would no longer be John Cochrane to Trump and the Fed's detriment.
